Exit strategy execution is a critical skill every covered call writer should master. In addition to managing positions where share price has decreased there are also situations where we can benefit when price has dramatically accelerated. Let’s look at a trade recently executed by one of our Premium Members:
Our member generated a nice 1-month return with downside protection of that profit. However, on expiration Friday the price of the stock has accelerated all the way up to $65.16 and the $50 call was very deep in-the-money. The question is “to roll or not to roll” let’s look at the options chain on this expiration Friday (May 17, 2013):
To buy back the $50 call (BTC) will cost $15.30. Let’s look at the trade if we roll out to the June $50 call:
What if we roll out and up to the $60, $62.50 or $65 strike choices? These scenarios will normally result in a net debit on the options side, but a net credit on the share price side as our $50 obligation to sell is eliminated and share value is enhanced to the new strike or current market value whichever is lower. Let’s look at the trade if we rolled out and up to the $62.50 strike:
The trade results in the following scenario:
We are guaranteed a 1-month return of 4.2% as long as share value does not depreciate by more than 4.1% by expiration Friday because we rolled out and up to an in-the-money strike. In my books and DVDs I give examples of rolling out an up to at-the-money and out-of-the-money strikes as well.
When a stock price moves up dramatically it usually does NOT pay to roll out as the option credit is negligible or non-existent. Rolling out-and-up may make sense because appreciation of current share value may surpass the option debit.
Next live seminar:
Thursday May 23rd Plainview, NY:
***A special thanks to BCI members who attended my presentation in Las Vegas for The Money Show. I can’t tell you how great a speaker feels when you’re given a double room and there is still standing room only.
This week’s economic reports put economists at ease regarding the fact that inflation does NOT appear to be rearing its ugly head:
- According to the Labor Department, the Consumer Price Index (CPI-A widely followed indicator of inflation. The CPI is a measure of the average
change over time in the prices paid by urban consumers for a fixed market basket of consumer goods and services. The “core” CPI excludes food and energy prices, which account for roughly one-quarter of the broad CPI and tend to fluctuate widely, providing a truer reflection of inflationary trends) declined by 0.4% compared to the previous month. A decline of 0.2% was expected
- Core CPI was up 0.1% half the amount anticipated
- The Producer Price Index (PPI) declined by 0.7% in April more than the 0.5% projected
- Core PPI was up 0.1% in April, half the amount anticipated
- Housing starts in April dropped by 16.5%
- Single and multi-family housing starts in April rose by 13.1% compared to a year earlier
- Building permits form privately-owned homes rose 14.3% in April compared to March and up 35.8% compared to April, 2012
- The Conference Board’s index of economic indicators rose by 0.6% in April following a 0.2% decrease in March
- Business inventories were flat in March while economists were expecting a 0.3% increase
- Industrial production fell 0.5% in April more than then 0.2% decline economists were anticipating
- Initial jobless claims for the week ending May 11th came in at 360,000 more than the 330,000 projected
- April retail sales rose by 0.1% much better than the 0.3% decline economists had projected
For the week, the S&P 500 rose by 2% for a year-to-date return of 18%, including dividends.
IBD: Confirmed uptrend
BCI: Moderately bullish favoring out-of-the-money strikes 2-to-1
Wishing you the best in investing,